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Author: Zeelotes Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 254176  
Subject: Re: Blending at a Whole New Level Date: 7/22/2008 3:52 AM
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Todd asked:
When you are backtesting a blend based on "Sharpe ASC", this means that each year, you choose the five screens (ranks 1-4) which have, up to that point in time, the lowest historical Sharpe ratios among all of our VL screens. Is that correct?

Yes, that's right. Sharpe ASC is a good example of a measure that I consider useless. It ranks in position #17 out of 24 for both the bullish and bearish. That means it produces the same rank position in both periods. In contrast, Sharpe DESC ranks #1 in the bullish period, and #17 in the bearish period. That is a diff of 16. There are only a few measures that show such a contrast between the two. Correlation is another measure with a huge contrast between the two -- -21 and -20. Even greater than Sharpe. Here, why don't I share the whole table I built of these values:
                         ASC   ASC   DESC   DESC                  
Screen Bull Bear Bull. Bear. Bull.Diff Bear.Diff
Correlation 1 1 22 21 -21 -20
Ulcer Performance Index 5 2 3 18 2 -16
Normalized Trough Count 15 3 14 16 1 -13
Calmar 12 4 6 12 6 -8
GSD Ratio 7 5 17 3 -10 2
Alpha 2 6 5 23 -3 -17
Ulcer Index 18 7 18 4 0 3
CAGR/(UI^x) 9 8 4 15 5 -7
Jensen 6 9 9 22 -3 -13
CAGR/(GSD^x) 13 10 11 11 2 -1
Sortino 14 11 2 9 12 2
Treynor/(Beta^x) 3 12 23 7 -20 5
CAGR/(SF^x) 11 13 12 19 -1 -6
Upside Potential Ratio 22 14 10 5 12 9
Sharpe/(GSD^x) 10 15 20 1 -10 14
Sleep Ratio 21 16 19 8 2 8
Sharpe 17 17 1 17 16 0
Beta 16 18 15 24 1 -6
Downside Deviation 23 19 8 14 15 5
GSD 20 20 7 20 13 0
Treynor 4 21 16 10 -12 11
Treynor/(GSD^x) 8 22 24 6 -16 16
CAGR/(UPI^x) 19 23 21 2 -2 21
Upside Potential 24 24 13 13 11 11

Anything over sixteen I consider a great measure, because the different sort completely and totally changes its rank position. Screens with a very low correlation to the S&P 500 do great for both the bullish and bearish periods, while highly correlated screens do horrible in both. I consider this a reflection of the fact that correlation as a measure is more highly robust than many other measures. The UPI is similar in that for the bear period the diff between them is 16. UPI is good in ascending sort for the bearish period, but horrible in descending sort. The greater the contrast, the more robust.

If so, then based on the "All Measures Compared" table, choosing the five screens with the worst Sharpe ratios each year would have produced a bullish CAGR of 34.83% and a bearish CAGR of 25.83%. Is that right?

Yes, that is right.

How many VL screens are in the universe that you're drawing from -- is it all VL screens that are in our current rankings?

I decided to use the all screens not marked as duds in the VL Pre-Post Discovery thread. My primary reason for this was simply to save time, not that I thought it would necessarily improve results.
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